”The World Is in Big Trouble.“

Our CEO Georg Winter shares his views on why geopolitical transformation is our focus this year and why it exacerbates existing risks and causes new risks to emerge.

Secretary-General António Guterres made this statement at the General Assembly of the United Nations on 20th September 2022 in New York.

We are undergoing times of permanent change, which many refer to as systemic transformation or multiple crises strung together. This change takes place in different fields and segments. They, in turn, are interlinked at various levels. HORIZON’s risk-oriented approach aims to define and outline the key areas of change affecting your company. In doing so, we take a close look at the systemic influences of ecological, geopolitical, technological and social transformation on your company’s risk landscape.

The 4 Risk Changers

The 4 Risk Changers

These transformation processes are very dynamic, they are often interdependent and thus characterised as complex processes. They also result in systemic risks. Managing them requires much more than traditional methods of risk management.

In terms of risk management, we refer to these systemic risks as “risk changers” that directly affect companies and categorise them as follows:

  • “Environment in danger” for ecological,
  • “Beyond globalisation” for geopolitical,
  • “Digital transition” for technological and
  • “Social disruption” for social transformation.

HORIZON – “Risk Thought » Fast Forward” is our platform for so-called risk thought leadership. It is based on our vision to detect the impact of these risk changers at an early stage and introduce risk management solutions that boost our clients’ resilience.

How do the 4 Risk Changers affect companies?

Companies are exposed to various kinds of risks. At the same time, systemic transformation exacerbates existing risks and causes new risks to emerge. These primary risks have a direct bearing on companies.

 How do the 4 Risk Changers affect companies?

Primary risks – Transformation leads to direct exposure

Ecological risks
When we look at climate change, we refer to climate risks. They are apparent in form of a changed or an increased exposure to natural disasters, such as floods, storms, hail as well as heat, drought or a rising sea level. As far as companies are concerned, these risks can cause anything from material damages to disruptions of transport routes, in energy, or raw material supplies.
 
Geopolitical risks
Geopolitical change, characterised by an economic bloc having been established between the USA and China, has put free world trade to the test. It also shows, by looking at Russia’s invasion of Ukraine, just how quickly a system conflict, which we thought had been settled between the democratic and autocratic world, can be reignited. All that, exacerbated by global events, like the Covid-19 pandemic, puts pressure on the availability of energy resources, disrupts supply chains and leads to a global wave of price hikes that challenge governments, businesses, and the civilian population alike.
 
Technological risks
Technological change has resulted in an over-dependence on data, software and IT infrastructure. All are targets of a rapid increase of cyber threats all over the world and are thus one of the biggest threats of the 21st century.
 
Social risks
The growing divide between rich and poor, the lack of equal opportunities regarding age, ethnic background and nationality, gender and gender identity, physical and mental abilities, religion and ideology, sexual orientation and identity as well as social backgrounds increases social tensions. The Club of Rome deems equality and justice as part of the ideal solution for a liveable future.

Companies cannot shirk their responsibility in this regard. For instance, social issues are becoming more and more important as we are facing an inevitable demographic change that has already resulted in a systemic shortages on the job market.
 
Correlation
The interdependency of these systemic risks is best demonstrated by the war in Ukraine: From a geopolitical point of view, it has led to an energy crisis. In terms of technology, it has led to an increasing number of cyber threats. On top of that, well-targeted campaigns are aimed at splitting society and disturbing social peace in our Western world. From an ecological perspective, however, there is hope that our efforts to reduce carbon dioxide emissions can finally be carried through.
 
Systemic change – Primary and secondary risks

Systemic change - Primary and secondary risks

Secondary risks – Adaption creates new chances and challenges

Besides these primary transformation risks, which affect companies as “pure risks” from the outside, systemic change leads to secondary transformation risks that are “speculative”. They derive from companies’ adapted business models that were developed in response to the systemic change and comprise both risks and opportunities.
 
Ecological adaption
In the fight against climate change, many companies have decarbonised their processes or have developed sustainable products. Saving resources and taking advantage of new opportunities are key focal points. However, new products and processes lead to new risks that must be identified at an early stage.
 
Geopolitical adaption
As a result of the geopolitical change, companies had to explore new markets and new sources for raw materials and find new ways of attracting both customers and suppliers, while keeping a watchful eye on possible dangers. Although the currently rising energy prices still paint a different picture, supply chains can be shortened through nearshoring. This could very well result in a wave of reindustrialisation in Europe.  
 
Technological adaption
Technological change enables us to pursue totally new paths. While the automation and digitisation of value chains is gaining importance, the full potential of mergers, transparency, big data, and metadata remains to be exploited. Manufacturers of previously traditional products and services are becoming system providers, goods are being replaced by data, and machines by platforms.
 
Social adaption
In the past, humans used to be regarded as resources. Now, humans with all their resources take centre stage. The concept of Industry 5.0. does exactly that. It places the human being at the centre to promote and foster diversity, different talents, and activities. Many companies have already initiated a transformation process because employees nowadays attach more importance on meaningful work. They believe that they can make a difference when it comes to resilience and sustainability.

Beyond globalisation – Geopolitical transformation in the spotlight

The upcoming release of HORIZON will concentrate on the geopolitical transformation and therefore looks at all its challenges from various angles.
 
New political world order
Does the war in Ukraine show us the dramatic face of a new political world order and how does this conflict at the very centre of Eastern Europe disrupt our economic basis?
How will the global trend of bloc formation between democratic and autocratic countries influence companies’ global business activities in the future?
What is the risk of technology being abused as an instrument of power and how could this affect companies?
How will the increasing conflict between the USA and China influence global economic relations?

Energy crisis
Blackout and a cold winter – how can we prepare for a total outage?
Will the current shortage of natural resources ruin Europe’s industry or will an ambitious energy transition turn Europe into a role model for a green global economy?

Supply chain dilemma
Will the geopolitical transformation result in a new era of offshoring, or will regional supply chains and increasing investments in circular economy boost independence and resilience?
How will China´s rise continue – considering its growing regional influence along the new silk road – and what will be the effect of its strategy of isolation as a result of its zero-tolerance pandemic policy?
Is the conflict over Taiwan’s independence a ticking time bomb for the global economy?

Loss of wealth
Will double-digit price increases lead to a decreased standard of living over the long term?
Does high inflation increase the risk of social riots in Europe?
How do these circumstances influence people’s work-life balance and their work attitude?
What does a new wave of migration mean for European companies and their DE&I (Diversity, Equity, and Inclusion) agenda?
 
It is indeed a difficult and challenging situation that raises many most pressing questions. We need to discuss them, their impact on the transformation of the risk landscape as well as possible solution scenarios.
 
Stay tuned!

Georg Winter

CEO

T +43 664 962 39 06

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Transformation in Global Insurance

Transformation in Global Insurance

After a series of big mergers at the end of the last century and a period of increasing financial stability, global insurance is now heading for a time of disruption and changing parameters: Climate change, pandemics, war and sanctions are becoming a part of the Western world. Inflation, digitisation, demographics and changes in work behaviour are among the most important factors affecting an industry that is still solidly based on 19th-century economic principles. How will global insurance and reinsurance adapt to new challenges and navigate the stormy waters of the 21st century?

It would be an exaggeration to speak of a “historical turning point” in the insurance industry, a term politicians nowadays use to describe global changes related to the war in Ukraine. Rather, we see a constant flow of changes having been made possible by technical improvements – both in know-how and advances in IT – as well as by management decisions, some of which set new directions in the development of this industrial sector.

A quarter of a century ago, when insurance managers were unsure if their clients’ data would survive the turn of the century because computers might not be able to recognise the new millennium, as the number ’99’ denoted contracts without a specific expiration – a phenomenon called the Y2K bug – there was even greater concern with respect to the level of operating costs. Too many employees administrated contracts and sold insurances only with the help of heaps of paper because IT was far from being fully automated. The answer to this was to merge companies to at least reduce overheads by creating a greater span of control. Statistics based on past premium and loss ratios, the “burning cost” method only considered past losses, and model calculations of future loss scenarios were too complicated and insufficient. Companies could only compensate for this situation with relatively high premiums, lower average wages, and substantial capital gains due to higher interest rates.

Technological transformation of the insurance world

The rapid development of IT office tools in the first years of the new century brought about a revolution (not only) in industrial risk calculation. For the first time, NatCat scenarios could be comprehensively evaluated and forecasts made, at least for catastrophes due to weather events. The tremendous development of access to the Internet made data collection from all parts of the world much easier. This has brought stability to the portfolio as insurers have gained a better understanding of the cost of claims that might be expected in the future.
 
Of course, losses from natural catastrophes increase further, there is a higher frequency and extent of individual events due to climate change and the concentration of insured goods in exposed areas, such as densely populated settlements on the coasts. These developments can still be included in the calculation of premiums. However, the weather phenomena that have increasingly occurred in recent years are a cause of great concern because their effects are longer lasting than those of individual events. First and foremost, it is the rise in temperature, especially in large cities, and large-scale droughts that claim numerous lives and destroy property every year. Especially in the case of agricultural risks, the limit of global insurance capacities is being reached. Hence, other means of compensating for damages must be found, often by the states themselves.
 
The insurance industry is therefore quite willing to adopt the efforts needed to achieve the Paris climate goals and other measures specified by EU legislation, such as the Taxonomy Regulation. For the time being, the leverage consists in restricting investments in companies that do not (or no longer) comply with the taxonomy as well as in refusing to insure such risks – the most typical example, at the moment, is coal. This strategy, known as “Net-Zero”, aims to encourage the transition to new processes for generating energy and new production methods in various industrial sectors.

Increased willingness to take over new risks

In the new millennium, great progress was also made in reducing the risk of fire through new, safer industrial processes, but above all through a greater awareness in companies for fire protection measures. This was one of the main drivers of the so-called soft market over the past two decades, which was not only a result of the commercial strategies of insurers. It is astonishing that this market behaviour has lasted for so long, despite insurers facing a constantly declining income from investments. At the same time, the results from sole insurance activities, defined by the “combined ratio” (= premium less claims and costs), have constantly improved.
 
This has also increased the willingness to take over risks that were previously considered uninsurable or very difficult to insure. These include the aforementioned natural hazards, including earthquakes, but also an ever-increasing expansion of coverage in business interruption insurance to cover risks associated with supply chains. It now seems that there are new restrictions concerning either the cover itself or individual premium corrections that are still pending. Hence, we may see a return to the hard market.
 
These transformation processes in technical, risk-related areas are not yet that spectacular. In fact, insurers are contemplating whether or not they should continue to have the same structure as in the past – as large, personnel-intensive companies that handle the entire business process from the first customer contact to the settlement of claims, from the maintenance of large office buildings to comprehensive processing of their own data. A number of external factors are responsible for the fact that it is more likely that these organisations will be split into small special units with increased outsourcing. In the ​​ core business, capacities are already being shifted back to special companies and outsourced underwriting agencies. Other areas, such as building management or data processing, are also suitable candidates.

Insurance transformation and Covid-19 pandemic

The Covid-19 pandemic – which has led to different financial burdens on individual insurance markets – has fundamentally changed the professional world through the widespread use of home office work solutions. Insurance is a particularly labour-intensive sector of the economy, but it has the great advantage that most of the work does not necessarily have to be carried out at the location of the company. Thus, home office work solutions will, at least partially, become the new norm in the insurance business of the future, with all the consequences, such as fewer office space requirements, more powerful IT systems and a stronger focus on social issues on part of management.
 
Even before the outbreak of the pandemic, there were intense discussions as to whether the sales process could be shifted to the Internet, just like in other business sectors, which would mean a drastic reduction in sales staff. Findings thus far show that the insurance customer likes to search for information and offers electronically, but still prefers the advice of a physical person when concluding an insurance contract. This can be explained by the complexity of insurance products as well as by the fact that most people interested in insurance would rather entrust their sensitive data to a person than to a machine. However, we can expect that future generations of “digital natives” will increasingly conclude their insurance contracts online. The insurance sector is therefore also investing in expanding its online options, for the time being primarily in products that require little explanation. The number of such products might increase in the more traditional or core areas of private insurance as well. The widespread shortage of skilled workers could fast-track this transformation.
 
However, insurance advisors do not have to worry that their work and jobs will become obsolete. On the contrary, providing expert advice about products will still remain their main task -, especially in corporate insurance, where the role of the advisor will gradually shift to ​​risk evaluation and risk management. Additionally, they will also continue to provide certain ancillary services.
 
As mentioned above, insurers have significantly increased their willingness to take on new and additional risks in recent decades. In addition to the property insurance risks, new offers in terms of so-called Financial lines, covers such as D&O and Cyber, and even more special solutions are now a standard, not just for large companies. Currently, some rethinking seems to be taking place, partially initiated by the war in Ukraine. Insurers are rediscovering the possibility of saying “no” to certain risks across the board. An example is the exclusion of entire territories from cover, such as Russia, or the withdrawal from certain exposed sectors, such as Cyber. The principle that “everything is insurable as long as there is an adequate premium for the risk” is overridden when other fundamental factors such as the principles required by governance and compliance come into play.
 
Other challenges, such as the current inflation and the continued low investment income, which will probably also lag behind inflation in the near future, will not be discussed here due to a lack of space. These challenges have either subsisted for a long time or they keep coming back. The insurance industry has learned to live with them and is still able to report very good economic results every quarter.
 
In summary, the transformation in the insurance industry can best be described with an image: The market participants are developing from large tanker vessels, which operate with many sailors and use nautical charts made of paper, to fleets of small, largely automated ships, which are heading towards their ports of destination with the help of GPS .

Andreas Krebs

Andreas Krebs

Head of Insurance Mediation Services

T +43 5 0404 229

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